Tax Reform Creates Gaps in Statutory Language

A broad overhaul to the federal tax code was signed into law January 1, 2018, but businesses are still awaiting guidance on the law from the Treasury Department, the Internal Revenue Service, and Congress.

The new law will bring significant changes for corporate entities as well as individual taxpayers, impacting many areas of business including the U.S. nominal corporate tax rate, corporate tax rate, capital expenses, pass-through taxes, and small businesses.

The tax law “touches virtually every area of the U.S. tax rules,” said global legal services provider Mayer Brown in an analysis of the bill. Corporations are already trying to figure out what the new provisions mean for profits and business. “Much of the meat of the new law is on the business side, where it fundamentally changes the taxation of corporations, pass through entities and multinational groups,” according to a memo from global law firm Davis Polk.

The new tax law took effect at the start of the new year, but Mayer Brown noted that there are a “number of gaps created in the statutory language.” These will require Treasury and the IRS to issue “significant guidance and regulations” to fully implement the tax act, the firm said.

The IRS and Treasury are expected to “develop a significant volume of temporary and permanent guidance” to implement the “uncertain provisions as well as modifications to existing provisions,” according to materials prepared by McDermott Will & Emery, a global law firm.

It is also widely expected that Congress will need to pass a subsequent technical corrections bill to clarify provisions in the law. The Davis Polk memo pointed to a “number of ambiguities” in the law. The firm anticipates that many of the questions will be addressed in “regulations or other guidance to be issued or resolved in a technical tax corrections bill enacted in 2018.”

The staff of the Joint Committee on Taxation is also likely to address “glitches” in the law in early 2018 via the release of a “Bluebook” used to explain the new law and its effects, according to Davis Polk. The government will be expected to prioritize which issues it releases guidance on first. International and pass-through changes may take precedence. The IRS will also need to prioritize materials dealing with how employers must adjust withholding on wages. Until technical corrections and guidance are released, businesses will need to watch and wait.

Prior to the bill passing, the big four accounting firms—Deloitte, Ernst & Young, PricewaterhouseCoopers, and KPMG—requested that the Financial Accounting Standards Board simplify income tax accounting rules in eight targeted areas once tax reform was enacted. FASB’s technical director Susan Cosper said at a December conference that the board will think about simplification in light of recent tax reform.

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